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ombudsman news

issue 119

August 2014

payday lending - the perspective of complaints to the ombudsman

The case studies in this issue of ombudsman news look at individual situations where things have gone wrong for consumers who took out short-term loans. But what we see in individual cases also gives us a wider insight into how the short-term credit sector operates and its impact on consumers - especially payday lending.

This month ombudsman focus talks to senior ombudsman Juliana Francis to get her thoughts on the payday loan sector, the complaints we’re seeing and what lessons there are to be learned more generally.

Juliana, could you start by giving us some background to the payday loan sector?

Payday loans are still a relatively new product in the UK’s financial market. They’ve been a growing presence for about ten years, but in that time they have caused increasing controversy. And in the last four or five years the sector has taken off significantly.

It’s a sector that attracts considerable media, regulatory and political attention. You’re likely most days to come across at least one story about payday lending in the press. And that’s a good indicator of the considerable issues and sensitivities the payday loan sector is facing.

The stories in the news usually focus on the costs, the interest rates and the affordability of payday loans - and they’re important stories to tell. But at the ombudsman we’re positioned rather differently to other organisations, so we have a slightly different perspective on things.

so what kind of cases are you seeing?

From what’s generally reported in stories about payday loans, you might expect that the main issues in the cases we see would be around the cost of the loans - both the charges involved in taking out short-term credit and the cost of the interest.

Yet while these issues are very important, it’s very rarely cost that’s the central point in the complaints we see. It seems that - from what consumers who bring complaints to us are saying - the headline stories aren’t necessarily the headline issues.

But what we do see are complaints involving the impact of payday loans on credit reports, debt-chasing and collection processes, continuous payment authorities, fraud, poor administration and more. And each of these factors presents its own particular challenges.

Perhaps unsurprisingly, we see that consumers who are most vulnerable, or have the most challenging money troubles, are the people who most often complain about high costs. But in general, the cost of the loans is a subsidiary issue in the majority of the complaints referred to us. High interest rates and high charges are the main reason for complaining in only 4% and 3% respectively of the cases we see.

is there a single main reason for people complaining?

Not really. We see a complex picture, with most complaints involving more than one problem. No single issue presents itself as the main cause of people’s troubles. Instead, the problems are usually varied and often interlinked.

But that’s not to say that we don’t see some things cropping up time and again.

For example, around one in six of the payday lending complaints that we see is about a loan the consumer said they hadn’t even taken out. This is very concerning. And there are things that lenders and consumers can all do to help the situation.

For consumers, some people might benefit from being more cautious. We know that younger consumers between 18 and 24 are twice as likely to have a payday loan complaint involving fraud.

On the other hand, we also see examples of older consumers over 55 being particularly susceptible to scams. So greater awareness of how to protect yourself from common frauds or scams would be helpful across the board.

But a large part of the fraud problem is down to lenders themselves. Payday loans are marketed as quick and easy to obtain. In fact, many lenders compete on speed as well as on price - so it’s no surprise that fraudsters are taking advantage. In some cases we see evidence that the lender’s checks weren’t secure or detailed enough to prevent fraud taking place.

what other areas need some attention?

Another aspect that we find highly concerning is the way some businesses reclaim money from consumers. In particular, we’ve seen worrying treatment of people who are vulnerable or in very difficult financial circumstances.

The inappropriate use of continuous payment authorities (CPAs) and some of the methods used to recover money owed features in one in five of the cases consumers refer to us. This is particularly unsettling, as a number of these cases involve people who are unemployed, disabled, experiencing mental health issues or otherwise in considerable financial distress.

And while we see evidence of good practice too, we still see too many cases where difficult situations are handled poorly by lenders. This includes aggressive or insensitive debt collection practices, and the refusal to allow repayment plans. Lenders need to be aware of their duty to treat those in financial hardship positively and sympathetically - especially those people who are most vulnerable.

are there more general themes in the complaints you see?

The rise of payday lending is often linked directly to the tough economic environment of recent years. Many people have been struggling to make ends meet and have found it much harder to get credit. So it’s easy to see why the marketing techniques used by payday lenders have been so effective in these circumstances.

But just as people often don’t fully recognise the impact of the interest and charges until it’s too late, similarly many people seem to have misconceptions about how credit files work. Some of the case studies in this issue of ombudsman news highlight how many consumers don’t always fully understand how payday loans - or any loans, really - impact on their credit scores.

In issue 118 of ombudsman news the chief ombudsman touched on these “information asymmetries” - businesses knowing considerably more than consumers. It’s an area of concern, and one that’s tricky to address.

Another aspect where I believe much clearer information can, and should, be provided is in relation to the right of consumers to have their concerns independently investigated.

how do you mean?

We’ve seen considerable evidence to suggest that many consumers taking out short-term credit aren’t being given their so-called “referral rights” to the ombudsman. By that, I meanbeing clearly and helpfully signposted to us by the lender in their final response letter following a complaint to the business. In disappointingly few cases do we see consumers being fully informed of their right to bring a complaint to us. In far too many instances, people are being given misleading, late, or incomplete information - and sometimes no information at all. This has to change.

The lack of clear referral rights to the ombudsman may be one reason why we’re not seeing as many payday loan complaints referred to us as we might expect. Last year we saw 794 cases. That was a 46% increase on the previous year. But this is still - we suspect - the tip of the iceberg.

do you expect the number of payday loan complaints to rise then?

We can’t be sure what will happen to complaint volumes in the future - so we’re working to make sure we’re ready for whatever comes our way.

The landscape of payday lending is already starting to change. In its final year of operating, the Office of Fair Trading (OFT) implemented a number of guidelines around payday lending. And since it took over responsibility for the regulation of consumer credit in April this year, the Financial Conduct Authority (FCA) has been tightening regulations - most notably around costs and “rolling over” loans. So in response, practice across the sector should already be shifting and improving.

But there are still some issues that we see cropping up often in the cases referred to us. So I wouldn’t be surprised to see more payday loan complaints come our way.

what kind of issues?

We continue to see instances of unsatisfactory customer service and poor administration. Everything from loans being paid into the wrong accounts, or not at all, to fees or interest not being correctly applied, and repayments not being registered. Things like these can and do make customers feel uncared for at best, and at worst worried and stressed.

Mistakes happen, of course - we all recognise that as an inevitable fact of life. But the rate at which mistakes are happening, and the lack of remedial action, paints a very poor picture of some practice in the payday loan sector. More needs to be done to strengthen lenders’ processes, checks and customer service - particularly when dealing with vulnerable consumers.

Some things are imperative and shouldn’t be hard to change - like telling consumers clearly about their right to refer an unresolved problem to the ombudsman. Other areas might be harder to fix. But improvements will benefit not just consumers taking out payday loans, but also the businesses themselves.

We’re starting to see some lenders already moving towards other products, away from the “traditional” 30-day payday loan. And we’re starting to see more complaints where the affordability of the loan at the outset is questionable.

It’ll be up to the regulator to decide how it approaches wider areas of concern such as these. In the meantime we’ll continue to look at the individual circumstances of each complaint we receive, to decide what a fair solution will be. And we’ll also continue to share the insights from what we see wherever we can. After all, learning from what’s gone wrong is by far the best way of preventing future complaints and improving things for everyone.

image: Kevinpayday lending insight report

You can find out more about payday lending from the perspective of complaints referred to the ombudsman in our recently published payday lending insight report.

 

image: Juliana Francis
Juliana Francis

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ombudsman news gives general information on the position at the date of publication. It is not a definitive statement of the law, our approach or our procedure.

The illustrative case studies are based broadly on real-life cases, but are not precedents. Individual cases are decided on their own facts.